India's economy is set to shrink by 9 per cent this year as measures to stem the spread of Covid-19 will keep private sector spending levels lower for longer, according to S&P Global Ratings.
This forecast is a revision from an earlier estimate that gross domestic product in the country would contract by 5 per cent, with the worsening outlook the result of a rising number of infections that is denting consumer and business confidence.
"One factor holding back private economic activity is the continued escalation of Covid-19," Vishrut Rana, Asia-Pacific economist for S&P Global Ratings, said in a note on Monday.
Asia's third-largest economy shrank 23.7 per cent in the March to June period, with private sector consumption dropping by 26.7 per cent and fixed investment sinking 47.1 per cent. Agriculture was the only major sector to expand, thanks to a favourable monsoon season.
The country had one of the strictest lockdowns in the world to contain the pandemic.
Although India's government eased nationwide movement restrictions in June, individual states have been reinstating lockdowns to clamp down on virus hotspots. New cases averaged 90,000 per day last week, up from 70,000 per day last month.
On Monday, 92,071 new cases were reported by India's health ministry, which is slightly lower than Saturday's record of 97,750 daily cases. The total number of Covid-19 infections in India now stands at more than 4.85 million, with 79,784 deaths recorded, according to Worldometer.
Google data showing mobility for retail and recreation purposes remained 40 per cent below its peak in the first week of September, compared to a 60 per cent decline when restrictions were at their height in the March-June period, S&P Global said.
The world's fifth-largest economy's problems are compounded by the limited scope for further monetary and fiscal intervention.
The Reserve Bank of India has already cut policy rates by 115 basis points this year to 4 per cent, but rising food costs pushed inflation to 6.69 per cent in August above the upper band of its 2-6 per cent target range.
In terms of fiscal stimulus, India's deficit rose to 24.6 per cent of GDP in the March-June quarter, "limiting the scope for further expansionary fiscal policy", National Bank of Kuwait economists said in a note last week.
S&P also revised its outlook for India, to "growth of 6 per cent in fiscal 2022 and 6.2 per cent in fiscal 2023".
Earlier this month, Fitch's domestic arm India Ratings and Research projected that India's economy will contract 11.8 per cent in the current fiscal year due to the pandemic.